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On Our Radar

Why Starbucks Corp. Shut Down La Boulange

Fans of San Francisco-based La Boulange were crying into their croissants this week as parentStarbucks Corp. announced it would close all 23 locations of the high-end bakery chain.

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The decision might seem like a surprise as Starbucks acquired the company just three years ago for $100 million. At the time, the coffee giant said it was taking over the bakery to "elevate core food offerings and build a premium, artisanal bakery brand."

Absent from that press release is any hint Starbucks was interested in the actual cafes. Starbucks wanted the brand and the expertise of French baker Pascal Rigo, who founded La Boulange. The brand will live on in Starbucks' shops, but Rigo will part ways with the coffee chain as his stores are shuttered.

Source: Starbucks.com.

By all measures, the acquisition has been a success for Starbucks-- food sales, long a headache for the company, grew 16% in its most recent quarter, contributing 2 percentage points of comparable growth.Sales of breakfast sandwiches, meanwhile, were up 35% year over year.

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Despite that growth, Starbucks said the stores were "not sustainable for the company's long-term growth."There are a number of reasons why the closures make business sense even if they disappoint La Boulange's loyal following.

1. ScaleWith just 23 stores, La Boulange's size pales in comparison to Starbucks' 21,000 locations worldwide. No matter how successful the La Boulange chain is, those store profits will never be material to Starbucks, and ultimately it's a distraction for management at the much larger parent company. There's no reason for the executive team to develop a plan for branding, marketing, and growing two chains when it only has to do that with one.

2. CompetitionStarbucks has made several acquisitions on its way to building its coffee empire, picking up brands including Seattle's Best Coffee, Tazo Tea, Teavana, and Evolution Fresh, all for different strategic reasons. Some, like Tazo, have been folded into Starbucks, while others like downscale coffee option Seattle's Bestand Teavana seem to be intended as separate brands.Like La Boulange, Seattle's Best stores were shut down after the Starbucks acquisition, which is unsurprising considering that they're both coffee businesses. However, it has expanded Teavana,which sells high-end loose-leaf tea, and has even experimented with a Teavana cafe, which serves brewed tea similar to the way Starbucks operates.

The difference between Teavana and La Boulange is that one is a complementary to Starbucks while the other is a competitor. Teavana stores provide something that Starbucks don't, while La Boulange, having had its menu installed in Starbucks, offers little from its stores alone.

3. FocusStarbucks seemed to have considered expanding the La Boulange brand at the time of its acquisition, but ultimately concluded that wasn't in the company's strategic interest. Management presumably believes its other recent acquisitions, such as Teavana and Evolution Fresh, have considerable growth potential, though it also announced it would close an Evolution Fresh location in San Francisco. La Boulange simply didn't pass that test.

Starbucks has made a habit out of acquiring companies to get new products and brands rather than developing those concepts in-house. This is an unconventional strategy for a restaurant brand, as most believe it's cheaper and reflective of proprietary knowledge to do it yourself.

If there's one negative unintended consequence for Starbucks, it's that the result of the La Boulange acquisition could make future combinations more difficult as most business owners don't want their creation milked for intellectual property and then tossed aside. Still, Starbucks has leverage like few others in the industry, and if it comes knocking with $100 million it might be hard for a small company to say no. Don't be surprised to see more acquisitions like this one in Starbucks' future.